Physical buying, not speculation, drives demand: Somasundaram P R

Interview with India Managing Director, World Gold Council

Rising import of gold has been a concern as it had a big role in pushing up India’s current account deficit (CAD) to a record 6.7 per cent in the third quarter of 2012-13. To curb the natural instincts of Indians to purchase gold more so when prices are low, the government recently announced plans to launch financial instruments like inflation-indexed bonds. In an interview with Sanjeeb Mukherjee, India managing director of World Gold Council (WGC), Somasundaram P R, says such instruments will only have a positive impact on overall demand for gold. Edited excerpts:

How far do you think instruments like RBI’s inflation-indexed bonds to have an impact on the overall demand for gold?

The issue of instruments like inflation-indexed bonds has already been discussed by the K U B Rao committee on gold loan companies (GLCs), released by RBI on January 2, 2013 and we feel it will be another new instrument for investment in the market. Today, gold is invested in the form of jewellery, bars and coins and many people are also aware of other tools to invest in gold as well. Inflation-indexed bonds are contextual and right, but how far it will have an impact on demand for gold remains to be seen. The first issue is of a value of around Rs 15,000 crore and the gold demand in the first quarter of 2013 is itself valued at Rs 73,000 crore. So I feel, instruments like inflation-indexed bonds will only have a positive impact on demand for gold.

Will the recent drop in inflation impact demand for gold, as its attraction, as a hedge against inflation will wean?

A recent WGC report showed that gold offers significant benefits in optimising risk-adjusted returns during periods of extreme market stress. Eight periods of crisis conditions including gold in currency-hedging strategies in an emerging-market portfolio were examined. This demonstrated cumulative outperformance of 2.4 per cent above an un-hedged portfolio and over one per cent above a currency-hedged portfolio. Though it is a long-term study, it shows that as a portfolio diversifier, gold retains its attractiveness and store value.

India’s trade deficit surged in April due to massive gold imports. Do you see the trend to continue in the coming months as well?

Well, in WGC, we do not make monthly predictions, but it must be remembered that last year during the same period i.e. April, the gold industry in India was on a strike; to that extent, the base must have been lower. Going forward, we have said gold demand will be 865-965 tonnes in 2013 with a possibility of it being towards the top-end of the band. Demand continues to be robust for gold in India.

There is always a talk that gold imports and demand rise because of increased speculative activity. What are your views on this?
We are of the view that the 860 tonnes of import of gold in 2012 was entirely because of physical demand and is driven by genuine need of small investors to protect their investment. Speculation is not an issue here; we are seeing a surge in demand for gold because of physical buying.